Investing in Argentina? Get ready to cry

In true dark-horse fashion, Argentina tops the list of best-performing global stock markets for 2013, as tracked by CNBC, with the country's MERVAL index rising by nearly 84 percent this year. But analysts such as Paul Christopher, chief international investment strategist at Wells Fargo Advisors, caution that the boom at the Buenos Aires bourse may be misleading.

Diego Giudice | Bloomberg | Getty Images

A trader works on the floor of the Buenos Aires Stock Exchange.

CNBC spoke with Christopher, recently back from a primary research trip to Argentina, about whether this South American emerging market—which spooked investors with the 2012 seizure of Spanish energy firm Repsol's 51 percent stake in oil producer YPF—is now looking like a better investment bet.

Q: What's going on in Argentina? Why the stock market surge this year?

Christopher: I don't think Argentina has made a true structural shift towards a more free market. But growing inflation pressures, the gap between the official and actual exchange rates, and constraints from creditors—external pressures—forced the government … to take some temporary measures that were more pragmatic and market-friendly.

First, [the government] agreed to a new methodology on the consumer price index (CPI). In a country where things are controlled—they control the flow of dollars out of the country—the CPI is important, because the more inflation you have, the more [financiers] will depreciate your currency. The government had taken to manipulating CPI figures. So it was important for them to come out and say, "Look, we're going to be more transparent and by being more transparent, hopefully we'll get the IMF to come in and they'll loan us money at more reasonable rates." Officials also have been in talks with Repsol, negotiating compensation for the expropriation of … YPF.

Q: And international investors took the bait? Or is it mainly domestic Argentinian investors who flocked back to the market?

Christopher: It's mainly domestic and a limited amount of foreign [investment]. The move started in June. The market basically did nothing in 2011, drifted in 2012 and then starting in June [this year]—right before midterm elections, when the prospects for the government's party to do well were diminishing dramatically—investors started to foresee some improvement in policy: more pragmatism, or maybe even wholesale change, in the government. They didn't get [the latter], but they did get some pragmatic changes that helped boost the performance of the market.

Q: So, who were the foreign investors? Were U.S. investors or funds among them?

Christopher: The U.S. funds? Generally, no. I can't think of a single one. I can, however, imagine Latin Americans with dollars available to invest who might be willing to take the chance that the government might impose restrictions on them cashing out and taking their money out of the country. There are quite a few people who have access to and know Argentina—maybe they live in Uruguay, Brazil or Chile—and they're willing to take the risk because they know the politics and situation on the ground. It doesn't take much to boost a very illiquid market.

"Argentina would be a treacherous place for a U.S. investor to be, because you just don't know what sort of regulations you'd have to contend with in the future."-Paul Christopher, Senior International Investment Strategist, Wells Fargo Advisors

Q: Are you saying once you invest in Argentina, you'd better get used to keeping your money there?

Christopher: The government may get more restrictive if their problems get worse. This is a country that needs dollars; they owe a lot of money to different people. They've already defaulted once. They have credibility issues going forward. Their reserves are down to just about six months' worth of imports. They've got to keep every dollar they can. They've even imposed rules on Argentines taking money out of the country for tourism in other countries.

Q: So the MERVAL rally these past six months is just academic for U.S. investors?

Christopher: Argentina would be a treacherous place for a U.S. investor to be, because you just don't know what sort of regulations you'd have to contend with in the future when you want to pull your money out. Frankly, the run-up they've had since June this year is already looking toppy to me. It's been based on some optimism that the pragmatism demonstrated by the government since the elections will carry over. I'm not convinced it will. I believe that the president [Cristina Fernandez de Kirchner] is a fairly dogmatic politician.

Q: Another surprise in our top 10 list was Egypt, with a No. 7 finish thanks to year-to-date growth of nearly 21 percent. Are U.S. investors heading there at all? Or is it similar to Argentina?

Christopher: I'd venture a guess that it's [non-U.S.] foreign investors; Middle Eastern, perhaps. I don't imagine that it's U.S. investors or funds. Any sort of sign of optimism that things aren't that bad now [in Egypt] was enough to bring in the penny stock hunters from different places. But Egypt is not a good destination for U.S. investors, either.

My advice to U.S. investors is that if you're looking for individual emerging markets, look for those markets where you see evidence of reform, such as in Mexico. Or already stable institutions and policies that prevent a country from going deeply into external debt. That would be Taiwan, South Korea and a few others. The ones that have a lot of debt—and Egypt and Argentina would be examples of extreme debt or instability—stay away from those, even if the returns look eye-popping on a shorter-term basis.